Friday, January 6, 2017

The Wide Macroeconomic Latitude for Success

The phrase “wide latitude” comes from the age of sail. It means that you are taking a passage between two land masses that’s wide enough that you can safely get through with low visibility. It’s the Drake Passage instead of the Straits of Magellan.

One lesson of macroeconomics is that there is a wide latitude of outcomes for a variety of policy inputs. This means there are a lot of situations in which good policies can turn out poorly, and bad policies can turn out well.

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Just to be clear, I don’t like Trump. I liked Clinton less. And I wasn’t very fond of Obama and hmmm … McCain, Kerry, Gore, and so on. In retrospect, I wish I’d been more tolerant of Romney. Bush II struggled to be OK in my book. With BIll Clinton, well, it’s hard to argue with success, but I do think having a foil helped.

WIlbur Ross is Trump’s nominee for Secretary of Commerce. He’s an investor in the Gordon Gecko mold: he buys distressed assets, gambling that some of their poor performance is due to poor management, and therefore fixable. He is not an economist.

Larry Summers is a macroeconomist (and a medium-lister for a Nobel Prize in the future). He’s also a former cabinet secretary, and got chased out of the leadership at Harvard for being too conservative (even though he worked in both the Obama and Clinton White House’s). I have some personal reasons for not liking Summers much, but I am warming up to him in his position as a Democratic eminence grise. It helps me that he was a strong internal critic of the Obama stimulus package.

… The paper authored by Ross, the billionaire investor appointed as commerce secretary, and Navarro, the economist named as the head of Trump's newly formed White House National Trade Council, goes "beyond any set of doctrine that has been taken up by any administration in my lifetime."

… "The logic of it, the arguments made, are so far out of the mainstream of any kind of responsible economic thinking that they are the economic equivalent of creationism."

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"So if this paper is to be a guide to US economic policy, and I'm not sure at all sure it will be ... but the kind of thinking that is implicit in that paper goes beyond any set of doctrine that has been taken up by any administration in my lifetime," he said.

I added the italic emphasis, and I think it’s important: a lot of people suspect that the Trump administration will not follow through on a lot of things they do to capture attention.

Even so, I think it’s clear this is a riduculously harsh opinion from someone with both expertise and experience.

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The problem for you as a student in thinking about policy and macroeconomics is that we can’t do experiments very well on this stuff.

Trump and his people could be right.

But policy is kind of like a roll of the dice. Trump has gotten the opportunity to roll. If he rolls well, does that mean he has some particular insight to rolling dice better than others?

He might. But the way to figure that out is to look, over and over, and different situations in which similar choices were made. Scientifically, we can’t have a good sense of whether Trump’s peoples’ ideas are good or not until 20 or 30 years down the road when we can look back at a whole bunch of similar situations.

Summers, speaking from experience, is noting implicitly that there isn’t much past evidence that positions like Trump’s have worked out well, on average.